This client advisory summarizes two recent developments concerning the ever-changing picture of U.S. sanctions on Iran: a recent penalty case issued by the Office of Foreign Assets Control (OFAC), which appears to break new jurisdictional grounds and the status of significant new sanctions legislation currently pending in Congress.
On May 21, 2012, OFAC announced a penalty settlement involving a U.S. entity, Genesis Asset Managers, LLP (GAM US). According to OFAC’s press release, GAM US is the investment manager for Genesis Emerging Markets Fund (GEMF), a Guernsey-organized investment fund. Pursuant to a management agreement between GAM US and GEMF, GAM US has authority as GEMF’s manager for investment of its assets. GAM US contracts with its U.K.-based subsidiary, Genesis Investment Management LLP (GIM UK) through an investment advisory agreement pursuant to which GIM UK provides investment advice and recommendations to GAM US relating to GEMF. The agreement authorizes GIM UK to carry out transactions as an agent of GAM US in accordance with the investment policies and strategies adopted by GEMF, the Guernsey-based entity. In 2007, pursuant to its delegated authority, GIM UK purchased approximately $3 million shares for GEMF in the First Persian Equity Fund, a Cayman Islands company that invests exclusively in Iranian securities.
The enforcement case is noteworthy because the prohibited transactions with Iran were undertaken by a non-U.S. entity but OFAC asserted jurisdiction under the Iranian Transactions Regulations over the agent’s U.S. principal. Although the settlement notice is cryptic and not all the facts are evident, the Principal GAM US was fined because it "failed to exercise a minimal degree of caution or care in the conduct that led" to the violation and that it was aware of the "conduct giving rise" to the violation. Thus, OFAC took the position that failure by the U.S. party to exercise supervision over its non-U.S. subsidiary, acting as its agent, coupled with (apparently passive) knowledge that that non-U.S. subsidiary agent was purchasing shares for a non-U.S. investment fund in a third-country company that invests in Iranian securities, constitutes a violation of the Iranian Transactions Regulations. This decision stands for the proposition that a U.S. person can be penalized for failure to prevent its non-U.S. subsidiary agent from conducting transactions with Iran that are otherwise entirely outside the United States. The implications of this enforcement action could be very significant for any U.S. company with a non-U.S. subsidiary that conducts business with Iran that could be seen as acting as an agent of the U.S. entity.
We note that the penalty case press release does not specifically reference a violation of Section 560.208 of the Iranian Transactions Regulations governing prohibited "facilitation" by U.S. persons of Iranian transactions by foreign persons and that from the description of the transaction, it appears that the U.S. entity did not take any specific action to facilitate the offshore transaction. Thus, it appears that this case is not a penalty brought under the longstanding OFAC prohibition on "facilitation."
We also note that the alleged violation occurred on August 1, 2007, which was several months prior to the amendment of the International Emergency Economic Powers Act (IEEPA) by the IEEPA Enhancement Act of 2007, which provides that any person (including a non-U.S. person) who "causes" a violation of OFAC’s sanctions may be held liable for both civil and criminal penalties. That new, broader prohibition applies only to conduct that occurred after October 16, 2007. Therefore, the penalty case does not appear to be posited on the 2007 amendment to IEEPA.
U.S. authorities have been expanding their view of U.S. jurisdiction globally. Any connection to the United States must be considered when foreign entities engage in transactions that are not allowed under U.S. law.
Status of Pending Iran Sanctions Legislation
As reported in our February 21, 2012, client advisory ("Congress Readies Additional Iran Sanctions That Would Close the Foreign Subsidiary Loophole"), the U.S. Congress continues to consider the "Iran Sanctions, Accountability, and Human Rights Act of 2012" (S. 2101). The bill contains an extensive package of new sanctions on Iran, including many that could significantly impact non-U.S. companies or financial institutions. However, progress on the bill has been slowed by Republican criticism that the legislation does not go far enough and that it should include a nonbinding provision endorsing the use of military force against Iran if Iran does not comply with U.S. demands in the ongoing nuclear negotiations. The exact content of the bill remains under negotiation between Republicans and Democrats in Congress, but it is expected eventually to move forward.